Do Amazon’s New Whole Foods Delivery Fees Give Walmart+ an Opening?

Amazon (NASDAQ:AMZN) will soon start charging customers for food delivery from Whole Foods Market, including Prime Members, who are already paying $119 a year for their membership. 

Customers have been told the purpose of the fee ($9.95 per order) is “to cover operating costs, so we can continue to offer the same competitive everyday prices in-store and online.” The upscale grocer maintains it was a preferable option to raising prices.

Customers will still be able to pick up their online orders at no extra charge.

Grocery bags being delivered by Amazon

Image source: Amazon.

Amazon is in the midst of an online groceries expansion, with industry analysts at Edge by Ascential expecting it will nearly double online sales to $26.7 billion in the next five years.

The retailer continues to battle Walmart (NYSE:WMT) and other supermarkets that are also heavily investing in online grocery shopping. But Amazon is expected to remain the top online grocer, as Walmart’s sales are only expected to hit $19.1 billion by 2026 (other surveys show Walmart slightly ahead). 

The pandemic caused consumers to embrace e-commerce for groceries in a big way, and chains are expecting it to remain an important growth avenue as consumers continue using the channel in the future. It was already rapidly expanding before the coronavirus outbreak, but lockdowns and stay-at-home orders caused many previously reticent consumers to consider using the option.

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Bloomberg reports Whole Foods delivered over three times more orders last year than in 2019. 

Data from Mercatus and Incisiv show that online grocery sales as a percentage of the overall grocery market grew from 3.4% to 10.2% last year and totaled $106 billion. They believe it will account for about 21% of total grocery sales by 2025, or some $250 billion.

Amazon doesn’t break out exactly how much it generates in online food sales, instead including it in its broad “online sales” segment along with the usual e-commerce products most associated with the retailer. But it rolled out online shopping soon after acquiring Whole Foods in 2017.

Until now, as long as Prime members’ grocery orders exceeded $35, they got free delivery. Now, in six cities, they’ll have to pay the $9.95 for such a convenience. The new policy could put it at a disadvantage to Walmart’s Prime-like Walmart+ membership program, which offers free same-day delivery for $98 annually.

Of course, Prime members get a lot more benefits for the annual fee, including movies, music, and more. Nonetheless, as groceries are becoming a key battleground, it could give Walmart the boost it needs to grow its loyalty program’s membership. (Express Delivery, Walmart’s two-hour delivery service, still costs $9.95, even for Walmart+ members.) 

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It’s not as if Whole Foods customers can’t afford the $9.95 fee. A demographic profile compiled by Numerator for Business Insider identified the average Whole Foods customer as a well-educated, millennial woman earning $80,000 annually who visits the store every three to four weeks.

That’s not too different from the typical Walmart shopper, who, although skewing slightly older (between 55 and 64), is also a woman earning $80,000 a year. But she tends to visit the store once a week 

Amazon already spends a lot on delivery. Last year, its fulfillment costs were $58.5 billion, up 45% from 2019, far more than the $25.2 billion it generated from Prime membership fees. While the new fee will help narrow the gap, it doesn’t appear it will do much to close it. 

Again, Amazon is only testing the new fee program in six markets (greater Detroit, Boston and Chicago areas and in Providence, R.I., Portland, Maine, and Manchester, N.H.) beginning Aug. 30, so it could soon find the cost of lost customers too high to roll it out nationally.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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View more information: https://www.fool.com/investing/2021/08/11/amazon-start-charging-prime-delivery-whole-foods/

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